Inventory levels have quickly become America's newest crisis, with the continued imbalance of supply and demand in the market.
Dr. Issi Romem, Chief Economist at BuildZoom, sat down with MReport to dive deeper into the home building sector and provide some insight on what to expect for the rest of the year.
MReport: Why are builders standing idle while inventory levels remain low and demand is continually heating up?
Romem: For starts, home construction is going up right now and it is [going up] for single-family homes as well. It’s just not hitting the pre-recession levels; it’s not at the level we saw in the early 2000s during the housing boom. And whether that’s a good thing or a bad thing is not obvious. It’s not trivial that we want to go up to those levels that we were at then. The catch to understanding how this corresponds to low inventory is that there’s not really a shortage of housing in America—there’s a shortage of housing in specific places in America. There are certain spots that are very high demand—in particular, certain metro areas like New York; like the Bay Area; like Boston, or D.C., or Seattle. And it’s in those metro areas where there’s a shortage of homes—where there’s very strong demand for living there, and the market has not been able to provide enough homes to meet that demand, and prices have been going up over the last three or four decades.
In my opinion, if developers were able to build more in these markets, they would. They’re looking for every scrap of available land, and they are provably trying to get the relevant zoning and permissions to build wherever they can. The challenges to building in these areas are preventing them from doing that to the extent that they probably would otherwise.
MReport: What challenges are first-time homebuyers facing in the market, and how can those challenges be addressed?
Romem: The answer for first-time homebuyers is really short: higher prices. That means they need to come up with more of a down payment, which is harder. In terms of what can be done in the “expensive” cities, I think land-use reform is called for. The challenge is figuring out what land-use reform means. And then once that’s figured out, figuring out how to get around political obstacles to applying it. There are not more homes built if those are single-family lots. Height limitations in places like San Francisco prevent greater construction [and] requiring parking spots per unit makes a lot of construction unfeasible at high densities. So obviously undoing laws like that could have a lot of improvement. But that’s not the whole story. There are many other rules that matter, and it’s hard to pinpoint what they all are even before you get to the political mirror and possibility of ever changing these rules.
MReport: What can be expected for the rest of the year and beyond it, in terms of construction and inventory?
Romem: For the rest of the year, I suspect that what’s been going on will continue. You will see construction numbers continue to increase slowly at a gradual pace, and you probably will see nationally how those prices continue growing as slowly as they have in the past year, if not a bit slower. My guess is that some parts of the country might be near an inflection point where they start dropping or at least they stay level for a while. I don’t know that there will be a sharp drop anywhere and I think because it’s just some cities that will be in that situation and not in others the two are going to balance out, and I think within a year or two you might see a situation where prices or stagnant or maybe slightly dropping and they will probably pick up after that. I don’t think there’s a big crash in our future but I anticipate a slight slowdown that will come from some cities and that will then pick up a bit more.
Editor's Note: To read more from Dr. Romem on the inventory issue, see his full interview in the "Take 5" department of the June 2016 issue of MReport.